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Busting 4 myths about income taxes

Who pays taxes, and who doesn't? Who's more likely to get audited? And what about that big refund check? Here's the scoop on 4 'facts' that really aren't facts.

By MSN Money Partner Mar 26, 2014 11:43AM

This post comes from Casey Bond at partner site MainStreet.


MainStreet on MSN MoneyIf there's one subject people love to complain about, it's taxes. No one enjoys looking down at a pay stub to see that huge chunk of income deducted. Yet in a recent survey by GOBankingRates, a whopping 79.1 percent of respondents admitted they aren't sure how their income tax dollars are used.


Tax form © Brian Hagiwara/Brand X/CorbisAnd who can blame them? At an ungodly 3.7 million words, it's no wonder few Americans have familiarized themselves with the contents of the U.S. Internal Revenue Code. It's boring, it's complicated, and most troubling, it's always changing.


One thing that probably won't change anytime soon, however, is the confusion Americans feel over taxes, especially with myths and misinformation that continue to circulate. So before you believe the next "fact" about filing, take a look at four common myths about taxes -- busted.


Myth No. 1: 47 percent of Americans pay no taxes

It was the statistic that came back to bite 2012 Republican presidential candidate Mitt Romney hard: 47 percent of Americans don't pay federal taxes.


The truth is while the Tax Policy Center estimated 46.4 percent of households pay no federal income tax, it also noted that close to two-thirds of those households did pay federal payroll taxes for Social Security and Medicare. Further, two-thirds of the untaxed households were elderly, close to the rest earned less than $20,000 per year. Not to mention, it's nearly impossible to avoid  federal taxes on common expenses like gas, alcohol and tobacco products.


Myth No. 2: Your tax bracket is the percent you pay in taxes

Your tax bracket definitely affects how much of your income is taxed, but not in the way you might think.


Marcus Dickerson, accredited asset management specialist for FMW Financial Advisors, LLC, said many people don't understand the progressive nature of the U.S. tax system, believing that once a certain tax bracket is reached, all income is taxed at that percentage.


"I've had discussions with several clients over the years who wouldn't get a summer job, because they thought it would push them into a higher tax bracket and cause all of their income to be taxed at that rate," said Dickerson. "The truth is, even the highest of earners in this country have the benefit of having a portion of their income taxed at 0 percent, a portion at 10 percent, a portion at 15 percent and so on."


Myth No. 3: You will only get audited if your tax return is wrong

Under 1 percent of individual tax returns are audited, though Janet Novak of Forbes noted that those chances increase once your income exceeds $200,000 annually. Even so, it's not always fudged numbers or "creative" accounting that lead to audits.


In many cases, the IRS simply wants to verify information and often, it turns out that information was reported accurately.


If you do get that dreaded piece of mail, don't be alarmed. Jordan Niefeld, a CPA with Gerstle Rosen & Goldenberg, P.A. in South Florida explained, "Of the approximately 1,500,000 individual income tax returns examined (audited) in fiscal 2012, only 25 percent were examined in the 'field,' as the IRS puts it. The rest were conducted through correspondence."

An audit could even turn out in your favor. According to Kiplinger, 66,381 audits performed in 2011 resulted in more than $1 billion in refunds.


Myth No. 4: The bigger your refund, the better

There is a lot of debate over whether it's better to get a big tax refund in April, or receive more income throughout the year with no refund at all. Both options have their merits, but one thing remains the true in either case: regardless of when you receive the money, in the end, it's still your money.


Getting a big check from the IRS isn't the equivalent of winning a prize from Uncle Sam. That's income you earned simply being returned to you. So while it's nice to see a big deposit in your bank account, know that it doesn't mean much -- except that you overpaid your taxes.


You will probably never be a tax expert, but you can be an informed taxpayer. Like all financial matters, income taxes can be complex and confusing. It's your job to educate yourself, learn to identify fact from fiction, and hopefully, be able to make smarter decisions with your money.


More from MainStreet

VIDEO ON MSN MONEY

93Comments
Mar 29, 2014 8:03AM
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I've never understood why people would give the government an interest-free loan of their money by over-withholding taxes from their paychecks.  The goal at the end of the tax year should be to break even; no taxes due, no refund.  If waiting for a tax refund is your sole means of saving money, you are headed toward serious money problems someday, especially when you want to retire..
Mar 29, 2014 7:08AM
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With as complicated as the US tax code it, there are only 4 myths to bust???
Mar 29, 2014 7:20AM
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income  taxes  you  dumba--   urinalists.....  47%  of  households  pay  NO  income  taxes...  we   are  NOT  talking  about   FICA   you   dopes....  this  is   a  tax   no  one  can   get  away  without   paying


duh

Mar 29, 2014 2:59PM
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52 million people on food stamps after 5 years of democrat occupation!
Poverty is at a 50 year high!
Salaries at a 20 year LOW!
Vote for Hillary!
Forward with more poverty!
Mar 29, 2014 2:36PM
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Regarding "myth no.1", it was Romney's intent that the "47%" was about paying no income taxes, not paying no taxes at all.  Virtually everyone pays sales taxes when they buy things in a store.   

Mar 29, 2014 10:31AM
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Getting a tax "refund" means that you OVERPAID.  How is that a "good" thing?

The key is to prepay ONLY the legally required 90% and KEEP THE REST until the following April. Even if you don't earn much interest, you'll still keep the use of YOUR OWN MONEY for as long as possible.
Mar 29, 2014 7:06AM
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I like getting a nice tax return check...I see it as forced savings. And, I'm not losing much consider the prevailing interest rates at banks these days.
Mar 29, 2014 10:23PM
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I love how MSNBC quickly tried to cover up that Romney WAS right!  The number of 46.4% of households not paying FEDERAL taxes made his numbers accurate!  (One hell of a lot more accurate than any of the estimates Obama and his cohorts have made on Obamacare!)  Social security and Medicare are payments for future services, not "taxes" as liberal try to say!  The simple fact is that about 47% of this country uses the rest of the country for free stuff and they vote OVERWHELMINGLY Democrat!
Mar 29, 2014 9:36AM
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You can change what you want to pay for Taxes at any time (W4), you can say you have 10 kids so you don't have to pay a dime in Taxes all year long. But when it comes time to settle up at the end of the year, you have to be honest about and claim the correct number of children. This is one big gamble of you think you are going to balance out to 0. What you are doing is Gambling on that years Tax Laws that aren't going to be printed until the next year. If you use 2013 Tax Laws watching out what you are doing this year you will be surprised come 2015 when the 2014 Tax Laws come out. 2014 Tax Laws won't even started to be written until about Oct. or Nov. 
Mar 29, 2014 2:18PM
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So... #1 is basically true.  Stop trying to help Obama.
Mar 29, 2014 1:50PM
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We lied for 3 full years and stole your healthcare  And u let us do it! Lmao U people are idiots!

Mar 29, 2014 1:02PM
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Financial rape of your paycheck and they want more
Mar 29, 2014 8:50PM
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Sounds like a lot of whining leeches on here.  "I want...but I don't want to pay anything for it..."  I invest in stocks, I pay the capital gains tax without whining.  Our soldiers are busting there butts to defend our country, the least I can do is pay in my taxes without whining.
Mar 29, 2014 10:59PM
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If  anyone is surprised by those four so called myths..... they are definitely part of the low information crowd. 

OBVIOUSLY the 47% quote was regarding  federal income taxes ONLY........  and everyone that works does pay some taxes 
Don't they still teach the difference between  marginal tax rate and effective tax rate in high school anymore???
Wouldn't anyone with a shred of common sense realize their chances of getting audited increases as income goes up and/or  having deductions outside the norm.......
Boy, if one doesn't realize that a "bigger" refund is a result of overpaying the govt. throughout the year........ I'm  guessing they get taken advantage of quite easily.... and likely often
Mar 29, 2014 1:40PM
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Don't listen to MSN re: income taxes --

either they lie or don't know what they're reporting.

Everything stated here has an exception &

one can only trust a qualified, professional accountant.

NO to H&R Block, etc., too.


Mar 29, 2014 1:10PM
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Flat tax...few exemptions...tax ALL income for social security, not just first couple thousand.

 

Mar 29, 2014 11:41AM
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Why is it that the name-calling seems to always come from the "righties?"  Can't even have a decent discussion without name-calling?
Mar 31, 2014 11:37AM
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Pee-On Lied has become the number one libtard poster on this site.  Bent has been replaced.  Congrats on being the number one fool!
Mar 29, 2014 11:19AM
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Mitt had it backwards. HE didn't pay any federal taxes for a decade. That's why he wouldn't release his tax records.
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